Grid Modernization Nearing the Tipping Point

A fundamental principle of regulation is that prices and services approximate the prices and services that would have been available in a competitive market environment.

Prices and services approximate the prices and services that would have been available in a competitive market environment.

Regulated local distribution companies (LDCs) are being challenged to deliver greater choice and value to customers and meet ever-more-aggressive public policy goals. At the same time, LDCs’ core business is being threatened by customers self-generating or participating in demand-response programs and customers improving energy efficiency or receiving electricity directly from third-party providers. The first-order effect of the reduction in sales associated with these alternatives is a reduction in revenue. Customers will see higher costs if these customers remain with the utility, regardless whether they choose not to engage.

Regulatory mechanisms like “decoupling” (separating sales from revenue) help utilities to meet their revenue requirements but increase rates for some customers. Customers pursuing alternatives to utility service might see higher or lower total energy costs, depending on the economics of the alternative. Nevertheless, customers will see higher costs if these customers remain with the utility regardless of whether they choose not to engage in the alternatives or are unable to avail themselves of self-generation and other services. Grid-modernization investments lower operating costs by providing utilities with a “cost take-out” opportunity while contributing to the asset base.

Technology is an enabler of many grid-modernization initiatives. Advanced distributed system automation and Smart Grid technologies alone make the grid more responsive and resilient. Grid-modernization investments lower operating costs by providing utilities with a “cost take-out” opportunity while contributing to the asset base and are thus entitled to cost recovery and a return on assets.

Balancing the need for grid modernization with the costs of modernizing the grid often prevents such investments, as discussed later. That is, an investment won’t be made unless it pays for itself and ultimately lowers costs to customers directly or through subsequent innovations made possible by the investment. Customers and utilities both win. Balancing the need for grid modernization with the costs of modernizing the grid often prevents such investments.

Thus, there is a market for energy services provided by either LDCs or nonutility providers, depending on the cost and value expected. Shopping for lower costs and higher value makes it possible for nonutility providers to compete in a competitive transactional market for its services.

Impediments to Grid Modernization

In 2014, the Massachusetts Department of Public Utilities (DPU) required the state’s utilities to develop grid-modernization plans with goals of reducing the effects of outages, optimizing demand to reduce system costs and costs to customers, integrating distributed energy resources, and improving the utility workforce and asset management. Central to grid-modernization efforts and each of these objectives was advanced meter functionality, as defined by the DPU. Four years later, on May 10, 2018, the DPU ruled in the proceeding and disagreed with utilities’ plans for installing smart meters to provide expanded functionality. The tension between grid modernization and “willingness to pay” is palpable.

The decision was based on business-case results for advanced meters, even while agreeing that grid upgrades were key to the industry’s future. The DPU approved other grid-modernization initiatives, including advanced distribution automation and management and Volt/VAR (volt-ampere-reactive) optimization. These were deemed foundational to support the growth of distributed energy resources. In these decisions, the tension between grid modernization and “willingness to pay” is palpable.

Promoting competition for alternatives to traditional utility service in a regulated market environment requires clear rules, well-defined performance metrics and regulatory oversight, and behavioral expectations based on how service providers recover a return of and on investments. Grid-modernization initiatives encompass a wide variety of information and operations technologies, automation, sensors, switches, and distributed resources. With customers and regulators demanding greater choice, nonutility providers of such services are being provided opportunities to compete with utilities for some of these services.

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